Singapore stocks could rally after Fed rate cut, say analysts

SINGAPORE - Investors should pivot to real estate investment trusts (Reits) and other segments of the Singapore stock market that are likely to benefit from lower interest rates, with the Federal Reserve poised to cut rates for the first time in four years.

Global markets have been on a roller coaster ride since the US central bank began hiking rates in March 2022. As the Fed heads for

its Sept 17-18 rate meeting,

analysts reckon risk assets, especially stocks, will see a knee-jerk rally as the era of the highest Fed rates in two decades – now at 5.25 per cent to 5.5 per cent – comes to an end.

“Anecdotal evidence of stock performance in previous rate cut cycles shows that the Singapore stock market benefited at the start of the easing of the interest rate cycles during the 2007 and 2019 rate cuts,” said CGS International in a strategy note on Sept 16.

The brokerage added: “We think investors should increase their exposure in S-Reits, which will likely benefit from the continued widening of yield spreads versus the 10-year government bond yield, with potential earnings upside risk in the medium term as funding cost trajectory reverses and inorganic growth opportunities pick up pace.”

While expecting another Fed rate cut in December, most market strategists warn that the size of future cuts hinges on the trajectory of the US economy, which now appears to be heading for a “soft landing” rather than a recession.

Although the latest US consumer price data suggests that inflation is close to its lowest levels since late 2022, the prevailing thinking is that the Fed will not rush into slashing rates aggressively, being cognisant of the risk of a resurgence in inflation akin to the 1970s where the then Fed chair Arthur Burns failed to keep monetary policy tight for long enough to permanently quell inflation.

According to the CME’s FedWatch Tool, traders last week were still betting on a 69 per cent chance that the US central bank will reduce rates by just 25 basis points when it meets this week.

“Our base-case remains for a 25-basis point (bps) cut on Sept 18, but we expect there will be some discussions – not decision – about bigger rate cuts primarily to maintain policy optionality,” OCBC Investment Research said in a note on Sept 16.

Mr Thilan Wickramasinghe, head of research at Maybank Securities, said: “We think it (a rate cut) will be taken positively by the market as it is a clear indication that the Fed is more confident of the path on inflation. Now, the bigger surprise would be a jumbo cut of 50 bps. This could give a strong sentiment boost to equities, especially rate-sensitive sectors such as Reits, telcos and even industrials.”

Analysts also point out that the Singapore market is trading at an inexpensive 12.7 times price-to-earnings ratio, as calculated on Sept 13, while offering a 4.7 per cent dividend yield – one of the highest across the region. By most accounts, the local market is somewhat undervalued and under-appreciated, they said. 

Top stock picks by Singapore broking houses include CapitaLand Ascendas Reit, ComfortDelGro, ST Engineering, Sembcorp Industries, Seatrium, Sats, Singtel, UOB and DBS in the big-cap segment.

In the small and mid-cap section, favoured stocks include Centurion, LHN, Hong Leong Asia, Singapore Post, Marco Polo Marine, Frencken Group and Dyna-Mac Holdings. 

But beyond these, there are scores of other companies that are trading deep below their net asset valuations. It remains to be seen whether a Fed rate cut could act as a catalyst for a re-rating across many of these counters.

In anticipation of a rate cut by the US central bank,

global funds have poured into South-east Asian markets

in recent months, according to media reports.

Money managers have been net buyers of Indonesia, Malaysia and Philippine equities for the past three months, boosting the currencies of these economies.

In Singapore, since the Straits Times Index recaptured the 3,400-point level on Aug 29, the market has seen $850 million of net institutional inflow into Singapore stocks, reversing almost two-thirds of the net outflow of $1.3 billion in the year to Aug 29, according to Singapore Exchange data. 

Analysts caution though that while stocks are likely to rally on a Fed rate cut, markets could remain volatile heading towards the end of the year, given uncertainties associated with the US presidential election in November, the uncertain geopolitical environment and potential global supply chain constraints.